Markets Wrap: US Futures Drop as Fed Official Dampens Rate Expectations

(Bloomberg) — Wall Street’s tech-driven rally — fueled by Nvidia Corp.’s rebound from a $430 billion rout — seemed set to run out of steam on Wednesday after a Federal Reserve official tempered expectations for US interest rate cuts.

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S&P 500 and Nasdaq 100 erased gains after Fed Governor Michelle Bowman reiterated her view that borrowing costs should remain elevated for some time. The 10-year Treasury yield ticked higher and a gauge of the dollar rose for a second day.

Nvidia climbed more than 2% in US premarket trading, adding to Tuesday’s 7% gain. Shares of the giant chip maker have soared this year amid unrelenting demand for its chips that dominate the market for artificial intelligence computing. Rival Micron Technology Inc. rose more than 3% ahead of its third-quarter results later Wednesday.

The volatility in Nvidia shares — which account for about one third of benchmark’s advance this year — has raised renewed concern about the concentration of megacap technology stocks in equity indexes.

“The combination of technology and communication services stocks now make up almost half of the S&P 500’s market cap, which is frightening and certainly unsustainable,” said David Bahnsen, chief investment officer at The Bahnsen Group. “The stock market is way too reliant on big tech stocks. Many of the big tech stocks are great companies, but even great companies can have unrealistic valuations.”

Among other premarket movers, FedEx Corp. surged more than 13% after an upbeat profit forecast. Cruise operator Carnival Corp. gained after posting a surprise quarterly profit and raising its earnings outlook. Southwest Airlines Co. fell as much as 6.7% after cutting guidance. General Mills Inc. fell after missing sales estimates.

Fed officials recently forecast just 25 basis points of reductions by the end of this year and a total of 125 basis points by end-2025, while market participants are pricing in about 75 basis points by the first quarter of 2025.

But some are starting to hedge against deeper and more rapid easing: positioning in the rate options market shows an increase in bets that stand to benefit if the Fed reduces its key rate to as low as 2.25% over the next nine months — a whopping 3 percentage points of cuts.

The Stoxx Europe 600 index reversed an early advance as declines for car makers and travel and leisure stocks offset gains in the tech sector. Among individual movers in Europe, Danske Bank A/S rose as much as 2.4% after lifting its full-year outlook. Just Eat Takeaway.com NV and Delivery Hero SE fell as much as 4% each after JPMorgan Chase & Co. forecast tepid growth for the food delivery sector.

In the absence of major data from the euro zone on Wednesday, traders are taking their cues from policy signals. Investor expectations for the European Central Bank to loosen monetary policy twice more this year are fair, according to Governing Council member Olli Rehn, who added that officials shouldn’t overly dampen economic activity.

Yen Watch

The yen breached 160 per dollar, a level that triggered a sharp reversal on April 29 due to suspected intervention, raising speculation Japanese authorities may take steps to support the currency again.

Japanese and Hong Kong equity gauges rose, while those in Australia declined. Australia’s dollar and bond yields climbed after the inflation numbers suggested price pressures remain stubbornly strong and bolstered the case for the central bank to resume raising interest rates.

China’s 10-year bond yield fell to a more than two-decade low as investors flocked to fixed-income securities amid concern about the slowing economy and expectations for further stimulus.

In commodities, oil rose ahead of a US government report on crude inventories and fuel demand following the release of mixed industry data. Iron ore climbed for a second day. Copper fell to the lowest in more than two months with prices facing sustained pressure from unusually weak Chinese demand. Gold was little changed.

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